Fixing the Dream for All Disaster -- Real Talk

Hello, everybody and welcome to a another episode of Real Talk. My name is Stephen Meade, I'm the managing broker here at Domicile Real Estate where we are on a mission to help California's renters and become homeowners and to that mission. And the reason I am sticking my tongue out and giving two big thumbs down, is we're going to talk about the California Housing Finance agencies dream for all program, a very ironic name for a program, which only lasted about 10 days before they announced the suspension.

And I'm going to talk a little bit about where did this program come from? What were some of the thoughts in creating it, and what I think the state needs to do to fix it? Because I think pretty much this launch was really, really an unmitigated disaster. So let's go ahead and talk a little bit about where is the need for this and what's going on. So when we talk about what are the challenges facing first time homebuyers in California, probably the biggest challenge that we run into number one challenge is getting on that bottom rung of what's called the property ladder. What is the property ladder, the property ladder is that idea that in California, it's difficult to get on. But once you're able to get on that bottom ladder, as your income grows, as things grow, you can you can keep moving up that property ladder to larger properties to bigger properties to Properties in a in a more desirable area. And what the phrase that a lot of people have used is that the bottom rung of the property ladder in California is broken or missing and that people really struggle just to get on that initial level. And there's two reasons for that.

Reason number one, is affordability. Right. And that's something that's fairly obvious, right houses are expensive in California, though, you know, I think if you watch our regular entry level market updates, where we focus on that entry level into the market, there are options available for people who have household incomes, you know, under $100,000, or round $100,000 of household income. So that's still not a small number, but that really does make it accessible to a lot of households in California. So that's problem number one we talked about as affordability. But problem number two, is the one that frankly, is a lot harder to solve and honestly, is the one that I think, especially affects, you know, minority homebuyers. And there's this notion in California, of our homeownership gap.

And that means certain groups of people are way more likely to be homeowners based on you know, ethnicity based on a lot of things that we talked about this homeownership gap. And really, there's a lot of things to try to we're we're trying to move that gap closer together in probably the biggest difference, right, for a lot of these groups, is that they don't have access to down payment money. And because of our elevated prices in California, the minimum downpayment for a conventional loan is 5%. For most people, some people can get it with 3%, and FHA loans is three and a half percent. And while these are very low down payment options, the problem that we have is on a $600,000 property, you know, even a 5% down payment, that is a $30,000 down payment plus closing costs.

So the situation that happens for a lot of people, is they're working to save for that downpayment. And even if you are saving $1,000 a month, right? So imagine someone who is working to scrape by and they're managing to put away another $1,000 a month in savings, that is still two and a half years before they get to that $30,000 down payment and what has happened to the prices of houses in that two and a half years. It's they've gone up more than $30,000. Right? So there's this terrible situation where people are getting farther and farther away from their goal. So the state recognizing that housing affordability is a major issue to voters and a major issue to residents. They started work a couple of years ago, and they charged the treasurer, the State Treasurer with doing some research into a program that could help Californians achieve homeownership. And they came out with a report and that report came up with many of the suggestions that would form the dream for all program in fact, I think they even were calling that report dream for all so they kept the name. And a big component of this was the idea that downpayment assistance was really important for for two reasons.

One, obvious you need a down payment, right? And it's very hard to say but the second one is by giving people 20 per sent down, that eliminates mortgage insurance. And that also increases the amount of home that people can buy, right. So if you had an extra 20%, you can essentially buy a home that is 20% more expensive. And that that can help a lot of people. And so this report came out a couple of years ago, it advocated that it set the stage to allocate a billion dollars a year to this right, billion dollars with a b, over 10 years, and that it should be a shared appreciation loan. And I won't go into too much detail. But a shared appreciation loan basically says, Hey, we're gonna give you 20% down to buy a house.

And when you sell that home, we want 20% of whatever it sells for, and in exchange for that, we're not going to charge you any payments. In the meantime, you get this money, it's like a gift. We're like the rich uncle, you didn't know you have, just give us our share of the money back when you sell. So the idea from this program, was that that we're going to put a billion dollars a year into it over 10 years, right? Because how long do people have houses on average, about 10 years in California, and that when that money starts getting paid back, it's going to be paid back at a higher level to reflect current home prices.

And that meant that this will be a self sustaining program. Right? It's going to keep going. And so that's the good part. Right? These were the suggestions. What actually got implemented was the state last year allocated $500 million. Cal HFA, the California Housing and Finance Agency announced the program about two and a half weeks ago, with $300 million in funding. So they held some of that back, it's not clear whether that was for administrative costs, or whether they have some additional allocation. I'm hoping it's the latter, it means they can make some changes to this program. And they launched this program, and they were out of money in, you know, record amount of time, they thought that we're going to help about one to 300 households, I actually think they ended up helping less than that. And there's a big reason why.

The big reason why is that this program does not have $1 cap on it, not written into it. What it does have is they said they will give you up to 20%. And if you're using a high balance loan, in LA Orange County's basically, it meant you could get up to a $300,000. Grant. And we've run the math on this. And I think people ended up taking bigger grants maybe than they otherwise would have. And so I actually think the state has made a really big mistake with some of the implementation of this program. Number one, I think it's a mistake that they have not kind of given some political cover and firepower to ensure that this program continues to be funded over the next 10 years. This needs to be that self sustaining program. That's really where the value is, because this could help generations of California's homebuyers. So number one is that they need to ensure this funding is going to continue. They also I wish it were a billion dollars and not the 500 million that the state ended up funding.

And here's the reason why we're gonna go through a little bit of a math and what I think is the biggest problem with this program is that frankly, it doesn't help enough people. So in any given year in California, there are approximately three to 400,000 homes that sell and generally speaking in California, historically, we've been about a third of those home transactions will involve first time homebuyer. So that means on a 400,000 on a year with 400,000 homes, changing hands, approximately 133,000 of those transactions will be first time homebuyers, now if they help 2000 people, right, that is less than 2% of homebuyers are helped by this program. I mean, that's nice and all but really, that's that's a drop in the bucket. And this program isn't for everybody. Not everybody wants a shared appreciation, love. But there are two groups of people that really need a program like this. Number one is the people that can't buy anything. Saving for that downpayment is such a burden to even get there that they are going to be forever renters.

If they don't have a little bit of help and assistance, they need that little bit of boost to reach that first rung on the property ladder. So that's what I think is the most important group of people in California. These tend to be younger people, these tend to be people may not make as much money. I think keeping these people in California is really important. So the second group of people are the people that can afford to buy something right now, but they can't afford to buy something that meets their needs. So maybe they qualify to buy a one bedroom condo right now. But they have three kids, right? That's not going to work for them. Right? They're better off staying renting or or or they feel like that might be their only option. So I think that's a smaller group of people. And the thing that bothers me the most about this program is I think they really had an opportunity to a limit the amount of the grants and I think they should have limited that to $100,000 or $150,000.

If they had done that, that still means a million dollar home buyer could get 10% towards a home purchase, that will do a couple things. A, it reduces the payment, B, it gives them their down payment. And then finally, the other thing it does is it reduces the mortgage insurance even if it doesn't eliminate it. So I think if they had set that grants at $100,000, they could have greatly increased the number of people who I think that the state needs to increase the funding of this department to the original billion dollars recommended in the report. I think if they do that, let's run the math on that if they have a billion dollars, right, but they have a billion dollars, and they have a limit on the grants of $100,000. That will mean that 10,000 people and 1000 households will be held the year.

That is that is basically between seven and 10% of the state's first time homebuyers will actually end up receiving assistance from this program. I think that's a much bigger number than the one and a half percent that are being held in Yes, I understand. And one of the things in the original report was that 20% down was where it made a meaningful difference in the payment. And while I get that, I think there's a whole group of people out there, they never get enough money to even buy anything at all. And I really think that should be the priority for the group that's being helped by this. And I think a lot more of those people will be helped. So this program really has been in a lot of ways a disaster. I think they pause the program because they do have some additional buddy, I think they're gonna really rethink this program.

So if anybody works that the California Housing Finance Agency is watching this, really take these recommendations to heart, the original group that worked on this was a working group that included bankers, real estate professionals, unfortunately, I was not asked to be part of this group. If I had been I would have I would have given my opinions as they were. But, you know, I think that there really is a chance to make some meaningful changes to this program that will create that self sustaining assistance to give people that boost to hit that first rung on the property ladder. I think that's the most important thing. Anyhow, thanks for watching. As always, if you are looking to buy or sell residential real estate in Southern California, namely orange or Los Angeles counties, and especially if you're a first time homebuyer who is interested in homeownership, definitely reach out to us we would love to talk with you. We are working on a another short webinar information session online that will be our home buying hacks, kind of the best tips and tricks that we've learned little loopholes, things that you might not be aware of, to both help with downpayment renovations and to really kind of close that gap and help get more people into houses which again is our mission to turn renters into homeowners. Don't forget to like, subscribe and hit that notification bell. Thanks so much for watching, and we will see you again real soon.